Value-Based Care Leads to Higher Costs for Surgical Complications

May 17, 2016 - As a result of recent efforts to bring value-based care to the reimbursement cycle, it’s now more important for both providers and payers to gain an understanding about the link between costs and surgical complications, according to a recent study in The Journal of the American Medical Association.

Surgical complications are increasingly leading to financial penalties and poor performance on quality metrics tied to payments, which are raising costs for both hospitals and third-party payers. As a result, both groups are now financially motivated to promote surgical quality improvement, said a research team from the University of Michigan Ann Arbor.

“Perhaps the best representation of the financial burden absorbed by hospitals is profit margin,” the team wrote. After conducting a study, researchers observed that overall hospital profit margins shrank from 5.8 percent for patients without complications to 0.1 percent for patients with complications.

For patients with private insurance, profit margin from those without complications was 9.9 percent. This amount fell to 7.6 percent for those that had complications. For patients with public insurance, “a negative hospital profit margin was present with or without complications,” researchers said. However, the negative profit margin was much greater when there was a complication. With complications, hospital profit margins were −6.3 percent.

In the study, researchers compared reimbursement costs, hospital costs and hospital profit margins for patients with and without complications.  Although, hospital costs, reimbursement from payers, and profit margin all varied with complications, researchers found that for all procedures, the average hospital costs were $19,626. This amount was 119 percent higher for patients with complications whose average hospital costs were $36,060. Individuals who did not have complications had an average hospital cost of $16,434.

Overall, average third-party reimbursement was $18,497. Third-party reimbursement for patients with complications was $35,870. Reimbursement for individuals without complications was significantly less at $17,373. Researchers also observed that the overall complication rate was 14.5 percent for all procedures. For general surgery specifically, the complication rate was 14.7 percent. For gynecologic surgery, the complication rate was 10.7 percent. Additionally, the complication rate for vascular surgery was 15.5 percent. Researchers also observed that the average age of the 5,120 patients in the study was 56.

Both third-party payers and hospitals experience increased costs when there are surgical complications. Hospital profit margins also experience a reduction. As a result, these factors should cause hospitals and payers to have financial incentives to promote surgical quality improvement.

Today, hospitals are more financially responsible for the costs of complications than they were prior to the Affordable Care Act when third-party payers bore most of the burden.

“Several emerging policy initiatives shift risk to hospitals by holding them accountable for the costs of complications,” the researchers wrote. “Under bundled payment plans, risks are accepted through combining payments for hospitals, physicians, and postacute care services, while accountable care organizations accept a degree of financial responsibility for care in exchange for potential financial incentives for achieving quality standards and savings benchmarks.”

To dodge increased costs, both payers and hospitals should clearly try to avoid surgical complications by making an effort to improve surgical quality, the researchers imply.

For the study, the researchers examined complication data from 2008 to 2015. They examined data from the University of Michigan Health System and complication data from the Michigan Surgical Quality Collaborative. They specifically looked at 5,120 episodes of surgical care for 24 surgical procedure groups. For cases with and without complications, researchers compared hospital costs, third-party reimbursement as well as hospital profit margin.

In the study, researchers noted that there was one high-profile study that demonstrated the opposite correlation between complications and costs. The study that researchers are referring to focused on contribution margin, which does not take into account fixed costs like overall profit margins do.

“Looking at contribution margin for a twelve-hospital system, these investigators found that it was higher for Medicare and private-payer patients in the presence of complications,” the researchers said. “For our study, we found a small decrease in contribution margin with complications, but we chose to focus our analysis on overall hospital profit margin, as it is more reflective of a hospital’s long-term financial stability.”

Overall, researchers found that on average, cases without complications usually have a higher profit margin. Although the previous study revealed that hospitals may be affected adversely in the short-term by reducing the amount of surgical complications, researchers of this study saw that profits over the long-term are positively affected by less complications.

Dig Deeper:

• Could More Competition Reduce Rising Prescription Drug Costs?
• 5 Ways to Cut Costs through Hospital Revenue Cycle Management